3/24/2009 @ 2:50PM

Climate Change Is A Trade Issue, Too

As part of his sweeping agenda for change, President Obama is seeking limits on carbon emissions. Rightly so. Even in these times of economic peril, there is no more imperative issue facing humanity than climate change.

But largely ignored thus far in the debate over climate change is the fact that climate change is not only an energy and environmental issue. It is also a trade issue. Any action on climate change will affect international trade obligations that bind the U.S. and more than 150 other members of the World Trade Organization.

Ignoring this fact in shaping our response to climate change could prove to be an expensive mistake. In particular, if international negotiations falter, and if the U.S. acts on its own to combat climate change, the failure of U.S. legislation to comply with WTO law could expose U.S. goods and services to economic sanctions by our trading partners. Those sanctions could cost billions of dollars–annually.

The need to act now, not later, on climate change has been underscored by a newly released assessment by the U.S. Geological Survey, concluding that the U.S. faces the possibility of much more rapid climate change by the end of the 21st century than previous studies have suggested.

Hopes are high for action on climate change as Barack Obama settles into the White House. Our new president has been clear. He favors mandatory targets for cutting the carbon emissions that are the leading cause of global warming. He aims to reduce those emissions by 80% by 2050. And he wants the U.S. to lead the way toward a global treaty that would achieve these goals.

Reports from the latest round of United Nations-sponsored talks in Poznan, Poland, heighten these already high hopes. With the U.S. fully engaged at long last, the world seems to be making progress, inch by belated inch, toward concluding a new treaty on global warming to replace the 1997 Kyoto Protocol.

Any trade restrictions imposed by a WTO member on another WTO member in compliance with a new global treaty on climate change would surely be upheld under WTO rules if both members had agreed to that treaty. Those who assume that WTO rulings will be “anti-environment” have evidently not read previous rulings, or not realized their positive implications for global environmental protection.

But what if growing economic fears frustrate international progress toward a new climate change treaty? If that happens, the U.S. Congress (and probably California and other states) may want to impose limitations on emissions unilaterally–perhaps in part to inspire global action. This is where the potential exists for violations by the U.S. of international trade law.

Any unilateral effort to put a price on carbon–such as through a “cap and trade” system or a direct carbon tax–could place U.S. products–especially such carbon-intensive products as steel, cement, glass, paper and chemicals–at a competitive disadvantage if foreign products are not required by their governments to pay that same price.

Moreover, placing an additional price on carbon domestically could cause domestic production to shift overseas and domestic consumption to shift to more carbon-intensive imports if no comparable action is taken outside the U.S. This “leakage” would undermine the environmental aim of reducing levels of greenhouse gases.

It makes sense then, both competitively and environmentally, to impose trade restrictions as part of any domestic legislation on climate change. Bills that have already been introduced in Congress and in state legislatures would do just that.

But any unilateral U.S. actions on climate change that included trade restrictions would unquestionably be challenged by one or more of our trading partners in the WTO. So it makes sense also to craft legislation in ways that would survive scrutiny in WTO dispute settlement.

For example, the additional carbon price imposed on domestic products can be imposed also under WTO law on like imported products as an offsetting “border tax adjustment.” But any such adjustment will be legal under the WTO only if imposed on products, and not on producers.

Likewise, any discrimination in the legislation will run afoul of WTO law if it discriminates in favor of domestic producers over foreign producers of like products, or if it discriminates in favor of some foreign producers of like products over others.

Furthermore, tax rebates on exported products, emission allowances, and other contributions by government to assist domestic industries affected by new carbon restrictions will need to comply with WTO rules on subsidies.

Some trade restrictions that would otherwise violate the WTO treaty can be excused under WTO rules for environmental reasons–but only if they are truly environmental measures and only if there is no arbitrary or unjustifiable discrimination in their application.

If careful consideration is given to WTO rules when crafting domestic climate change legislation, WTO obligations can be met. But if WTO obligations continue to be ignored in the climate change debate, the U.S. may well lose when that legislation is challenged in the WTO–at great expense to American workers and businesses–and with unwelcome and unforeseeable consequences for both trade and the environment.

James Bacchus is a former Democratic member of the Congress from Florida, a former chairman of the Appellate Body of the World Trade Organization, and author of the book Trade and Freedom. He practices law in Washington with the firm Greenberg Traurig.